Applied Rationality focuses on public policy issues and tries to take a liberal perspective that is consistent (comments to the posts will often show otherwise) with neoclassical, rational-choice economics.

Wednesday, January 30, 2008

The Office of Management and Budget has announced that it will stop providing free printed copies of the President's budget for members of Congress and their staffs. Printed copies will still be available, but members will have to shell out $200 per copy. As in previous years, an electronic version of the document will also be posted on the web.

The move will clearly save the White House money, but is it good policy? Members of Congress don't think so.

Congress is understandably upset because the White House is shifting a set of costs from its budget to Congress'. So, from a taxpayer perspective, the savings aren't as big as the White House is touting. One group's costs have gone down, while another group's have gone up.

However, there probably will be savings. Free goods get misused, or more precisely over-consumed. At $200 a pop, a Congressperson (or more likely her chief of staff) will think twice before handing a copy of the budget out as a souvenir or giving a copy to the intern who runs the autopen. Congressional offices will now have to compare the benefits of a paper copy to the actual costs of production. Demand for the printed copies is likely to go down, leading to less printing and lower overall costs for the government.

From a social standpoint, there are also some downsides. Many types of budget work are easier to do with printed copies. By making paper copies more expensive, the White House is raising the cost of Congressional oversight and increasing the likelihood that something will slip by unnoticed. In other words, the White House is increasing the cost of good government. However, it is legitimate to ask how many printed copies are necessary to perform this function.

Some other costs of this policy may also be overlooked. People working with e-documents often print sections or whole copies from their office computers. This is a much less efficient and more costly way to generate copies. As staffers seldom see the marginal cost of each print-out, this can lead to overuse and some very high costs.

One gets the sense that President Bush gets a kick out of sticking it to Congress, and there is certainly an element of that in this latest move. However, the change in printing policy looks like a net cost-saver.

Tuesday, January 29, 2008

CNN has held a Democratic presidential candidates debate and will hold a Republican candidates debate that are each sponsored by a group with the innocuous title Americans for Balanced Energy Choices. Sounds fair enough. From the name, you would think that the group promoted all sorts of energy alternatives, such as renewables, nuclear energy, and the like, or maybe even promoted conservation. You'd be wrong.

The group is actually an "astroturf" organization, that is, an industry-funded organization that is supposed to look like a grass-roots organization. Who are the funders? Coal-based power plants, including North Carolina's own Duke Energy.

The group states its mission as:

We believe that America can continue to make great progress in improving environmental quality while at the same time enjoying the benefits of using domestic energy resources like coal to meet our growing demand for affordable, reliable and clean energy.

In a word … we believe in technology.

It's all quite touching.

The group also touts the coal-industry's success and commitment in cleaning up its plants. Of course, it doesn't mention that the technology it cites was only instralled after the Clean Air Act Amendments of 1990 required power plants to adopt cleaner technologies like scrubbers. It also does not mention the industry's commitment to fighting these requirements, including Duke Energy's fight all the way to the Supreme Court, where the industry lost decisively in 2006. It also doesn't mention that it's real purpose is to get more coal plants built, in many cases against local opposition.

Americans do need balanced energy choices, but this organization won't be providing them.

Thursday, January 24, 2008

In response to the signs of a weakening economy, the Federal Open Market Committee (FOMC) of the Federal Reserve System lowered on Tuesday its target for the federal funds interest rate. Today, the White House and Democrats from the House of Representatives announced a tentative deal on fiscal stimulus package that would likely provide tax rebates to low- and middle-income families.

The FOMC decision only directly affects the federal funds rate, the interest rate that banks charge each other when they lend through the Federal Reserve. However, many other interest rates key off the federal funds rate, so rates available to consumers are likely to fall. The stimulus package, should it actually pass, should put money directly into people's pockets.

Both actions are intended to spur people to spend more and reinvigorate the economy. This is likely to happen, at least to some extent.

For many Americans, however, it might be worthwhile to look at how lower interest rates and some extra cash might help their permanent personal finances.

According to the last Survey of Consumer Finances conducted in 2004, three-quarters of American families held some debt. Four out of nine American families had outstanding credit card balances. Families with incomes between $40K and $90K were especially likely to owe the credit card companies. If your family is in this group, it would be a good idea to use the tax rebate and the possibly reduced interest rate to attack that credit card balance. With current rates for many families at usurious rates of 18, 21, or even higher percentages, an extra payment toward the credit card balance would provide a much higher return in terms of the household's net worth than almost any investment on the market.

Lower interest rates also mean that it is a good time for households to refinance their mortgages and lower their indebtness. During the credit expansion that accompanied the housing bubble, many families took advantage of the lower interest rates and easy financing to borrow extra amounts against what they and the banks thought was the value of their homes. Refinancing, however, can also be used to decrease indebtedness. The simplest way to do this is to leave all of the terms of the mortgage the same, except the interest rate--that is, to refinance without taking any extra money out and without extending the period of the mortgage. Some people also took advantage of the lower rates to actually cut the length of their loans. For households with interest-only mortgages or amortizations greater than 30 years, a standard 30-year, fixed-rate mortgage may now be within reach.

Unsustainable run-ups in debt have been a big contributor to the current economic problems. Fixing some of those individual problems might reduce the immediate effects of the stimulus measures but would go a long way toward fixing the underlying, long-term problems in the economy. In any case, it would help some people sleep easier at night.

Friday, January 18, 2008

As the chorus for providing an economic stimulus grows louder, several plans are recommending an extension of basic Unemployment Insurance (UI) benefits beyond the current six months of coverage. There are good reasons for these plans. Most importantly, they are targeted toward people who are actually hurt by an economic slowdown--those who are involuntarily unemployed. The benefits are politically attractive because they only go to people with work histories and who continue to try to find employment. The benefits are somewhat calibrated with the magnitude of any slowdown; more benefits would be paid (there would be a stronger stimulus) the greater the extent of unemployment. Finally, they are skewed toward low-income households, so the money is likely to be spent rather than saved, again providing for a larger stimulus.

More generous or extended UI benefits, however, also have a serious drawback, which is that they reduce people's incentives to quickly find work. The benefits allow unemployed people to be choosier in accepting their next job, leading to longer unemployment spells and a slower overall recovery.

Given that unemployment appears to be headed up and that jobless spells are likely to grow longer, extending UI benefits to either nine months or a year seems both compassionate and reasonable. However, policymakers should consider an additional change to the UI system to mitigate the employment disincentives and that is to offer re-employment bonuses.

The way that a re-employment bonus would work is that a job seeker would receive a bonus payment if she accepted a job before her UI eligibility ran out and if she held that job for some period of time (that is, stayed off the UI rolls). The bonuses could be structured like exploding job offers in high-powered law and finance firms so that the amount of the bonus declined with the period of unemployment. For instance, the bonus could be half the value of someone's remaining and unused UI benefits. All or part of the bonus payment would be withheld until after the worker had worked a certain period.

The logic behind the re-employment bonuses is straightforward: they provide incentives to go back to work instead of staying out of work and provide those incentives earlier in an unemployment spell rather than later.

There is good evidence that re-employment bonuses not only shorten unemployment spells but also save the government money. With funding from the U.S. Department of Labor, the state of Washington experimented with (randomly assigned) different re-employment bonus amounts for unemployed workers there in 1988. An analysis of the Washington experiment found that it reduced both the length of unemployment spells and the overall amount of compensation. Bonus experiments conducted in Pennsylvania and Illinois also showed that unemployment spells could be trimmed.

Given the many existing strains on the federal budget, the stimulus package should be as effective as possible. Creating cost-effective incentives for out-of-work people to get back on their feet as quickly as possible should be an element in the current proposals.

Wednesday, January 16, 2008

This morning, the Department of Labor reported that consumer prices rose 4.1 percent last year, the largest December-to-December increase since 1990. The consumer price numbers were in line with producer price figures that were reported earlier this month. Inflation was moderately high even after food and energy prices are taken out of the mix; the core rate rose 2.4 percent for the year.

One surprising component of the consumer price figures was that they showed shelter costs increasing at 3 percent for the year. The shelter figures are based mainly on changes in actual rents, which increased 4 percent last year, and imputed rents for owner-occupied housing, which were estimated to increase by 2.8 percent.

For nearly 25 years, the shelter component of the consumer price numbers has been based on this imputed rent figure rather than direct measurements of mortgage, house price, and property tax figures. The rent figure is intended to get at the consumption component of housing and to abstract from the investment element. However, there are times when rents diverge from these other fundamentals, leading to questionable results.

Shelter costs account for nearly one-third of the index. Raise your hands if you really believe that prices for owner-occupied houses increased last year. If we instead assume that there is a mistake in the CPI formula and that the change in shelter costs was essentially zero, the inflation rate drops by a full point down to 3.1.

In an interview with ABC News yesterday, President Bush said, "I'm sure people view me as a warmonger and I view myself as peacemaker." Where, oh where could people ever have gotten such an idea.

Maybe this misapprehension came from this Feb. 7, 2004 interview with Tim Russert when the President said, "I'm a war president. I make decisions here in the Oval Office in foreign-policy matters with war on my mind."

Maybe it came from this "aw shucks" restatement in a Aug. 6, 2004 campaign speech. "I wish I wasn't the war President. Who in the heck wants to be a war President? I don't. But this is what came our way. And this is our duty, to protect our people. It's a solemn duty, and I'll continue doing it to the best of my ability."

Or maybe from this Sept. 9, 2004 campaign speech. "I never thought I'd be a war President. As a matter of fact, you know, I was hoping I wouldn't be a war President. But the enemy attacked us on September the 11th. It's an event that I will never forget. It is a duty that I will honor, which is to keep America safe."

Or maybe from this Oct. 26, 2006 speech. "I said, I want to be a war President. [sic] No President wants to be a war President, but I am one."

Tuesday, January 15, 2008

The start of 2008 has brought a slew of negative economic reports. On January 4, the Department of Labor reported that the national unemployment rate in the U.S. had risen to 5.0 percent in December, up from 4.7 percent in November and 4.4 percent a year earlier. From December 2006 to December 2007, the estimated ranks of the unemployed grew from 6.8 million to 7.7 million people, and the percentage of the population employed dropped from 63.4 to 62.7 percent.

New data from the Census Bureau indicate that seasonally adjusted retail sales dipped 0.4 percent from November 2007 to December 2007, though December's sales were still up from a year earlier.

The job and sales figures suggest that economic growth is slowing. Whether the slow-down amounts to a recession is still a 50-50 proposition. Regardless, it appears that the economy is no longer growing fast enough to keep up with population growth.

The stock market is reacting negatively. For the year, the S&P index is down just over 5 percent. The index has already dropped more than 12 percent from its recent high and is near its 52-week low.

To compound the bad numbers, the Labor Department today reported that the Producer Price Index (wholesale prices) rose 6.3 percent in 2007, the largest yearly increase in a quarter of a century. The prices of crude food and feed materials rose by just over 25 percent for the year, while the prices for crude energy materials rose by just over 20 percent. President Bush spent part of his day pleading with OPEC to increase oil supplies.

The consumer (retail) price numbers will be released tomorrow, but already consumer prices for the year are up about 4 percent without the December figures. The Federal Reserve's Beige Book, describing local economic conditions will also be released tomorrow.

Although the price increases appear to be largely confined to the food and energy sector (for now). The prospect of a flat or sinking economy and escalating prices resurrects concerns about 1970s-style stagflation.

Wednesday, January 9, 2008

Walter Dellinger and Sri Srinivasan had a nice analysis yesterday in Slate.com of the inefficacy of voter identification laws--requirements that people show poll workers a valid government-provided ID before being allowed to vote. The principal argument in favor of these provisions is that they cut down on voter fraud and thereby increase the integrity of the electoral process. The primary argument against the provisions is that they impose burdens on voters, especially low-income and elderly voters, which reduces participation and representation in elections. Republicans tend to favor the laws, while Democrats tend to oppose them.

If we can move past the purely self-serving aspects of these provisions, the arguments essentially come down to a cost-benefit analysis. Proponents claim that there are large potential benefits in terms of reduced voter fraud and only small costs because IDs are so ubiquitous. Opponents claims that voter fraud is negligible and that the laws disenfranchise tens of millions of people who lack IDs. What Dellinger and Srinivasan bring to this debate is a nice discussion of the mechanics of these procedures and thus of the marginal impacts.

To impersonate a registered voter, an impostor would have to already know the voter's name and address and provide these details to a poll worker. Poll workers could further ask the person for the registrant's birth date (states require this data to verify that the person is actually old enough to vote). This creates a very high informational hurdle for a potential impostor.

In addition to these informational barriers, there are a couple of other practical issues. Most importantly, there are laws and penalties against voter fraud, so the impostor would need to take steps to avoid detection. For example, he or she would need to be sure that the actual voter had not already shown up at the polls and cast a ballot, otherwise the fraud would immediately be discovered. Along these same lines, there are limits on the number of times that a single individual could commit this crime (it's not like he or she could immediately get back in the queue at the same precinct and pretend to be someone else). Finally, as mentioned above, the impostor would have to have a fairly sharp mind, needing to commit all of the victim's personal details to memory (a person who needs to consult a cheat-sheet before providing basic identifying information tends to rouse suspicion).

To be sure, forms of reliable, current identification are needed in other circumstances, including the initial registration process and certainly in the case of same-, or election-day registration (North Carolina has such a procedure). However, once registration has taken place, a subsequent requirement to produce a valid government ID does almost nothing to stop fraud and therefore confers little benefit.

Given that IDs are required at the time of registration, one might claim that there also is little cost of an election day ID requirement, but this overlooks the fact that considerable time can pass between the registration and election days. During this span, people could lose their driving privileges, or especially in the case of the elderly, could simply let their licenses lapse. These people would clearly be disadvantaged by a voter-ID provision. Also, while it might be worthwhile to bring an alternative form of ID, such as a passport, one time to the registration office, it would be more costly to dig these same documents out every election day. Finally, even if one buys into the argument that the costs are low, this hardly justifies enacting a law with such little practical benefit.